Do Industrialized Countries Hold the Right Foreign Exchange Reserves?

10 Pages Posted: 3 Apr 2013

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Cindy Hull

Federal Reserve Banks - Federal Reserve Bank of New York

Sarah Kathryn Stein

Federal Reserve Bank of New York

Date Written: April 2013

Abstract

That central banks should hold foreign currency reserves is a key tenet of the post-Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

Keywords: foreign currency, industrialized countries, foreign exchange reserves

JEL Classification: F30, F40

Suggested Citation

Goldberg, Linda S. and Hull, Cindy and Stein, Sarah Kathryn, Do Industrialized Countries Hold the Right Foreign Exchange Reserves? (April 2013). Current Issues in Economics and Finance, Vol. 19, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=2243697 or http://dx.doi.org/10.2139/ssrn.2243697

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-2836 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cindy Hull

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Sarah Kathryn Stein

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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